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Three ETFs Crushed By BAC's 2011 Freefall

23.05.12

One of the many appealing attributes of ETFs is the ability to achieve broad exposure through the purchase of a single ticker, thereby whittling away any company-specific risk that comes with individual stock picking. While the “instant diversification” provided by ETFs and mutual funds can go a long way towards minimizing the impact of a single security on bottom line returns, it is important to note that certain ETFs can still feel the pinch from poor performances out of a single stock.

For starters, not all ETFs are created equal in terms of balance and depth of the underlying portfolios. While some stock ETFs have thousands of individual holdings and don’t assign a weight of more than 1% to any single security, others are more top heavy in a few big names. For example, Exxon Mobil ( XOM ) accounts for about 19% of the Energy SPDR ( XLE ), with Chevron making up another 15% or so [try our Free ETF Stock Exposure Tool ]. Among international equity ETFs, it isn’t uncommon to allocate more than 10% to an individual stock–generally one that is found in the energy or financial sector. That concentration can obviously translate into material company-specific risk; if the stock in question performs well, it can be good news for the entire fund. If the largest weighting struggles, however, a single name can offset stellar gains from other, smaller components.

Source: ETF Database